How important is the "Limited Warranty" clause?

I just received an offer from Stephens Land Services in Norman, OK to lease 12 acres in Okfuskee Co. 14-11N-11E for $200 bonus, 3/16 royalty, and a 3-yr. lease. I asked for standard Exhibit A clauses and they sent them back with three of them deleted ("Commencement," "Cessation, Drilling, and Reworking," "Separation of Liquids") and part of the "Limited Warranty Clause" was deleted as well. (See attached--they crossed out what they won't accept).

I found this set of Exhibit A clauses here at the MI Board, and they've all been accepted by other companies. When I asked the landman why these clauses weren't accepted, I got the following response:

The reason for striking through the Commencement clause is because it restricts the drilling. The drilling company wants to drill as quickly as the mineral owner, but certain things may prevent this from happening within the timeframe of the commencement clause. They don't want to be out any time or expense either.

And the Cessation, Drilling, and Reworking-along the lines of the commencement clause, too restricting.

Limited Warranty-They will not agree to the last part because they will not be responsible for those payments.

Should I refuse their offer based on their not accepting the entire set of Exhibit A clauses?

Thank you in advance for any advice you can offer.


148-MaryG.HavelTrustExhibitAClausesforoilandgasleases_Changes.docx (17.3 KB)

sounds to me like Stephens Land Service wants to lease on the cheap and flip to someone. The more restrictions in the lease, the harder it is for them to unload. I know that OK prices are below those in Texas, and have never gotten a good explanation of why, but I would swap the bonus for a 25% royalty, and not accept their changes. Check the area to see if any activity is occurring, and perhaps shop the land yourself.

It seems that the company you are negotiating with is not serious about taking your lease.

The "COMMENCEMENT" clause you requested is favorable to the you as the mineral owner, but not unreasonably so. Companies who actually intend to drill rarely push back on this clause if requested.

The "CESSATION, DRILLING, AND REWORKING" clause is nearly identical to the terms of most "standard" oil and gas leases such as the Producer's 88 form. The time period is negotiable (you proposed 90 days, they may want 180) but otherwise this clause is standard in any lease.

The "SEPARATION OF LIQUIDS" clause just says they will install a separator for "wet gas." They would do this anyway and I see no reason why any company would object to this requirement. If they would be willing to sell wet gas without running it through a separator first you probably don't want them operating your lease anyway.

Finally, and most telling, their objection to your 'LIMITED WARRANTY" clause is asinine to the point of being comical. All this clause says is that they have the right to avoid foreclosure of your property by making your mortgage or property tax payments that you have missed, which you would have to pay back to them. These payments are optional - they are not obligated to make them. Once again, this clause is "boilerplate" in every oil and gas lease form used in the US. The language they struck is 100% in their favor.

12 acres doesn't give you a lot of leverage to negotiate, but the Exhibit A you attached to your post is reasonable to request even for a small tract. If they won't accept your terms, then they are likely only interested in buying leases that are easy to flip, and you should consider holding out for someone who is willing to take a lease on your terms.

Thanks for the reply...I sent a reply asking what oil/gas company Stephens represents, and haven't heard back yet. I know they've been mentioned here at the MI board before, and I looked them up online (they appear to be legit) but something about them doesn't smell right.

Thanks for the great info, Andrew, especially about the "Limited Warranty" clause. We own only the mineral rights, so by my understanding this clause wouldn't apply. We pay only federal and OK state taxes on the royalties we receive from producing properties. Still, though, they didn't give a good explanation of why they wouldn't accept that clause.

Agree with Andrew. The clause they struck in the limited warranty clause is actually in their best interest.

It is possible it was struck because of redundancy. Many (if not most) printed lease forms contain this same provision, or one highly similar to it.

Excellent point!